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Bitter Fruits of the State’s Environmentalism
The Unseen Effects of Environmental Programs and Regulations on Agriculture
Robert Clark
12/11/2013

ECON 420

The federal government has deemed the free market incapable of conserving natural resources and preserving the environment, and has therefore passed many conservation regulations and programs which have effects on the agricultural sector of the economy. These programs are often expensive, but are said to be worthwhile as they allegedly help preserve the environment. Some programs, such as the Conservation Reserve Program, are entered into voluntarily by farmers to prevent soil erosion, but these have dangerous secondary effects on agriculture and rural communities. Regulations exist on air and water pollution coming from cropland and animals. These regulations add another problem for farmers as they make it much more costly to run a farm. The unseen results of these programs are often higher farm commodity prices, an artificial shift away from agriculture, and decreased profits for many farmers. When compared to the alleged benefits of these regulations and programs, the high costs are not clearly justified. Though the programs and regulations do provide a better environment regarding farming, they are likely not the most efficient route to environmental protection. Free market incentives and protection of private property constitute a superior alternative to these government programs which introduce negative secondary effects into the agriculture economy. The effects of government programs are an example that government failure is often the culprit, not market failure, and that free markets and private property can most efficiently preserve the environment as demanded by those in the economy.

The Conservation Reserve Program (CRP) was established as a program to reduce soil erosion by retiring vast amounts of cropland from farming use and planting grass or trees, though this has been done at great costs. CRP is the largest United States land conservation program partnering private individuals and the state. CRP makes up $2 billion of the annual federal budget. The goals of the program are to reduce soil erosion and also decrease production of farm commodities to increase their market prices. It pursues these goals by paying farmers an annual rental rate for the farmers to retire their cropland and plant grass or trees for a contracted period of time, either 10 or 15 years. The CRP program also has a cost-share assistance aspect, which has amounted to costs of $90 million, as it pays up to 50% of farmers’ costs of planting soil-preserving plants and other barriers to soil erosion (Ferris and Siikamaki, 2009, 1, 10). CRP also has particular subprograms, such as the Conservation Reserve Enhancement Program (CREP) which is a version of CRP that partners the federal and state governments for more focused soil conservation efforts (Ferris and Siikamaki, 2009, 8). This program, which essentially rents cropland from farmers, naturally incurs high costs to the federal government.

The costs of CRP can be particularly high if the farmer has especially erodible land. In Pennsylvania, the rental payments for CREP are between $70-$120/acre annually. The farmers can also receive $5-$10/acre for yearly maintenance. Farmers are eligible for compensation up to 50% of restoration expenses and particular construction expenses, as well as other cost sharing incentives. Pennsylvania’s CREP boasts that five acres of cropland enrolled into CREP for 15 years, with new fences built on the land, could result in total payments of $13,925 to the farmer (CREPPA, 2006). The CRP currently has 33.6 million acres enrolled, which amounts to 8% of America’s cropland, at an annual cost of around $2 billion (Ferris and Siikamaki, 2009, 11). This high cost is deemed necessary to prevent the alleged market failure of over-farming and soil erosion which supposedly caused the Dust Bowl of the 1930s.

The Dust Bowl was a term that described the dust storms and other problems resulting from severe soil erosion caused by the over-farming of Midwest cropland. This led to the creation of the Agricultural Adjustment Act, a predecessor of CRP, to solve the problem. The Dust Bowl was historically considered to be a market failure as it was claimed that the free market incentivizes over-working of farmland in order to produce more crops. This over-farming then results in increased erosion of the soil. However, the Dust Bowl was actually the result of government failure through the misallocation of resources caused by the federal government’s Homestead Act. The Homestead Act limited farm claim sizes to between 160 and 320 acres from 1880 to 1925. The small size of these farms required the owner to farm all of his land in order to have enough crops for his family to survive. The farms were so small that it was impossible for good soil conservation practices to be done while also producing sufficient income. Thus, the government’s Homestead Act distorted the size of farms to make them inefficient which led to the over-farming that caused the Dust Bowl. The government failed by restricting the size of farms, incentivizing farmers not to leave land fallow, therefore allowing wind erosion to create the Dust Bowl. The Homestead Act’s artificially small farms were particularly inefficient in the semi-arid areas of the Midwest. In these areas, the most efficient form of farming would have been on ranches, which would have to be much bigger than the restrictions of the Homestead Act plots. Instead, the small farms would have to be over-farmed which caused the Dust Bowl (Hansen and Libecap, 2003, 9-12). However, this instance of government causing environmental problems, not the market, ironically led to later government programs, such as CRP, to prevent soil erosion through land retirement.

The Conservation Reserve Program has approximately 34 million acres of farmland retired at any given time, which has necessarily resulted in a decrease in the supply of farmland and caused negative side effects. The reduction in supply necessitates an increase in the market price for farmland, which means rental rates and purchase prices for land to farm are higher because of the CRP. When 8% of the supply of cropland is removed from farming, the market price of cropland must rise, other things equal. It has been estimated that CRP has increased land rents by between $18 and $25 per acre, which is a significant increase (Wu and Lin, 2010, 2). The increased rental and purchase rates for cropland then increase production costs for farmers. Cropland is one of the most important assets in the agricultural sector, so its price is a significant chunk of production costs for farming. As CRP increases the price of land, farmers not enrolled in the CRP program would see a decrease in profits because of the higher costs of crop production (Wu and Lin, 2010, 2).

The decreased supply of land, via CRP’s retirement of farmland, also results in the secondary effect of a reduction in new farmers entering agriculture. Without farmland in use, it has become more difficult for a person to enter farming. For example, from 1982 to 1997, the number of farmers under 35 years of age fell 58%. With less land being farmed, there are fewer opportunities for workers to enter the agricultural labor market or purchase their own farms. This has resulted in the potential for depopulation of rural communities. The counties with low CRP enrollment regularly have around 50% more young or new farmers compared to high CRP enrollment counties (USDA, 2004, 60-62). There is clearly a negative correlation between CRP enrollment and having new farmers, as the reduction in supply of farmland makes it more difficult for people to become farmers. So CRP distorts the economy away from farming through the increased production costs caused by the decreased supply of the main factor of production, farmland.

The CRP also reduces the supply of farm commodities to increase their price, as a secondary effect, which is alleged to aid farmers; however, these high crop prices have other effects throughout the economy. It is clear that while these higher crop prices might benefit farmers, they will have a detrimental effect on anyone who purchases farm outputs, which includes essentially all consumers. The prices of corn, wheat, soybeans, and other crops that are retired from production will increase and cause consumers to not be able to buy as much food products. This artificial effect on prices will reduce the wealth and satisfaction of these consumers, as it causes them to generally shift away from purchasing crop products to attaining less desired ends. Also, while some farmers might experience initial profits with the higher crop prices caused by the reduction in supply. These profits would dissipate, as input prices, including for land, would increase. This input price increase would occur because the prices would be bid up by farmers seeking profit from the increased crop output prices. The costs of farming would rise and the initial profit to farmers would be washed away (Carden, 2009, 17-18). However, CRP would ultimately result in a net decrease in crop production as farmers are incentivized by the CRP payments to shift away from production of crops.

With the reduction in crop production, CRP also causes a decrease in the demand for farm inputs, further shifting the economy away from agriculture and distorting rural economies. With the artificial reduction in farming caused by CRP, the demand for tractors, fertilizer, seeds, labor, and other farming inputs collapses. This decreased demand causes potential problems for rural communities largely based on farming. Resources, businesses, and production structures would likely not be easily transferred to other lines of production in many rural communities, which have been completely based on agriculture for their entire existence. The farm families that receive CRP payments would become dependent on the payments and the families involved in producing farm inputs would see their profits drop. The CRP payments could result in a complete realignment of rural economies. These rural economies would then see a loss of capital as the agricultural capital and inputs would no longer be needed in the realigned economy. This realignment would result in an overall reduction of wealth in rural communities and non-CRP families would particularly experience a loss of wealth with the new market distortion (Martin et al., 1988, 231). The period from 1992 to 1997 especially saw a reduction in farm related employment, which was correlated to the amount of land in CRP in a given county. Some farm-based counties saw an overall decrease in employment and income due to CRP land enrollment (USDA, 2004, 57-58). The CRP program shifts investment away from farm related businesses and rural communities, while also reducing agriculture-related employment opportunities in these regions.

CRP’s secondary goal of increasing crop prices has a secondary effect, slippage, which counteracts a large amount of CRP’s attempts at successful conservation. The increased prices of crops incentivize farmers to plant crops in marginal lands not normally used for farming in order to keep up production and profit off the higher prices. The planting of these marginal lands counteracts the conservation from the land retired into CRP, as the newly planted land will likely be less productive, more erodible land. A strong correlation exists between CRP enrollment and acres of non-cropland converted to crop production. Across the United States, for each ton of soil erosion reduced by CRP, about 50% of that amount is counteracted by soil erosion from converted cropland. In 1992, an estimated 30% of land enrolled in CRP in the Corn Belt, the worst water erosion region in the country, was counteracted by slippage (Wu, 2000, 984-989). One study of wheat acreage in the Great Plains found that slippage for short term retirement plans was 54% and for long term contracts it reached 76%. The slippage generally fluctuated between 40% and 60% nationally from 1988 to 1994 (Leathers and Harrington, 2000, 87-88). Clearly, CRP does not reduce soil erosion as efficiently as it first appears. Many secondary effects of CRP exist which counteract CRP’s primary goal because of the natural incentives which its secondary goal, of increased crop prices, produces.

Advocates of CRP also tout it as a voluntary program to benefit the environment and reduce soil erosion; however, this entirely ignores the fact that CRP is based on taxpayer funding which is taken coercively, not voluntarily. CRP is voluntary on the level of farmers making contracts with CRP, but its entire basis is coercive and therefore does not satisfy actual market demands. Because CRP is funded involuntarily by taxpayer money, it is impossible to definitively say that CRP is worth the cost. Cost-benefit analysis of CRP does not confirm that the program is cost efficient. For its 10 year contracts, the federal government will pay nearly $20 billion to retire 36.5 million acres of land. The USDA regularly prioritizes meeting acreage enrollment quotas. Therefore, the government enrolls land at higher rental rates or enrolls land that is at lower environmental risk in order to meet these quotas. This target is normally set at 39 million acres, which is less than the USDA is commonly able to enroll. Thus, they must increase costs and get less marginal benefit to meet this quota. Rental rates have been paid that are two to three times higher than the projected normal rental prices (GAO, 1992, 3-4). The Economic Research Service has even estimated that the environmental benefits of CRP only amount to between $6 billion and $13.6 billion, which is a range significantly lower than the $19 billion spent on rental payments alone at that time. CRP spends money inefficiently by enrolling acreage just to meet quotas and does not even enroll the most environmentally risky land, as only 30% of the most erodible land is enrolled in CRP. The cost-effectiveness of CRP is largely reduced because of its focus on meeting its secondary goal of lowering commodity production (GAO, 1992, 5-6).